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November 7th

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What really lured Republicans into a trap was the timing of the arrangement. The beginning of 2013, when the automatic spending cuts take effect, coincides with the expiration of every penny of the Bush tax cuts. And so, by postponing the fiscal reckoning, Republicans inadvertently scheduled it for the very moment when Obama (should he win reelection) will hold his maximum leverage. Last summer, Obama was pleading with Boehner to give him $800 billion in additional revenue. Come January, he’ll have $5 trillion in higher revenue without doing anything. Since Obama’s own budget proposes to raise only $1.5 trillion in new revenue and trim entitlement spending, he could then offer Republicans a deal that cuts taxes (by, say, a couple trillion dollars), increases military spending, and reduces entitlement spending. In other words, he could offer a right-wing bill—and the end result would be a mix of policies to the left of his own budget, and to the left of the Simpson-Bowles proposal.

If Romney wins the election, Obama’s leverage disappears. As part of their big-bang vote on the Ryan plan, Republicans could just cancel the tax hikes and spending cuts they don’t like without finding other ways to fill the hole in the budget, and live with the pain of being called deficit hypocrites by Rachel Maddow and Paul Krugman. But if Obama wins, starting on January 1, everything that has held true in Washington for the past two years flips upside down. Even tax reform, which the two parties have endlessly discussed but failed to agree on, will suddenly become very easy, because instead of using reform to make people pay more, any new reform will tax people less. The term that keeps popping up among Obamans is break—as in, “we have to break the Republicans on taxes.” Assuming Obama wins reelection, the moment the apple falls in Times Square, the Republican anti-tax crusade will be broken, and with it the pathology that has launched the deficit wars.

This is not the story you have heard about the budget. You have probably heard a terrifying tale of dysfunction and impending doom, with the catchphrase “the fiscal cliff” used by budget wonks to describe all the automatic changes scheduled for January 1. It’s a story of disaster that could arrive by accident and must be prevented at all costs. Every aspect of this narrative is inaccurate.

The term “fiscal cliff” has leached into the broader political lexicon, though few people understand what it means, and many of them invoke it to mean its precise opposite. Among Republicans, especially, “fiscal cliff” has come to signify their Obama-era fears of a Greece-style debt crisis. Pete Peterson, an investor and longtime fiscal hawk, has devoted more than a half-billion dollars to lobby for a bipartisan debt-reduction agreement, funding a vast network of centrist anti-deficit activists, like the Concord Coalition, the Committee for a Responsible Federal Budget, and an organization called “the Campaign to Fix the Debt,” all of which have pounded a national drumbeat warning against the perils of the fiscal cliff. “Rhetoric won’t fix the debt, action will,” warns a statement by Fix the Debt. A “solution to the nation’s fiscal crisis,” scolded the Washington Post editorial page, which closely echoes the views of the Peterson network, “can be implemented only if Republicans and Democrats hold hands and jump together.”

This is all utterly wrong. Bipartisan agreement is not necessary to fix the debt. Nothing is necessary to fix the debt. It is as if the network of activists, wonks, business leaders, and Beltway elder statesmen who have devoted themselves to building cross-party support for a deficit deal have grown more attached to the means of bipartisanship than to the ends for which it was intended. The budget deficit is a legislatively solved problem. It is, indeed, an oversolved problem. In the absence of any agreement between the president and Congress, the deficit will shrink to less than one percent of the economy by 2018, and remain below that level through 2022. The budget deficit declines so sharply and so drastically, and in ways that neither party is entirely comfortable with, that the task for Washington is to pull back on deficit reduction.

It’s true that should all this come to pass and Congress does nothing at all, allowing all automatic deficit reductions to stay permanently, then our economy would be hit by a powerful shock—a massive anti-stimulus. This is the outcome that terrifies moderate liberals like Howard Fineman, who warns that the nation is about to “go over the fiscal cliff with no hang glider.”

But here is a case where a bad metaphor has caused everybody to think about the matter in exactly the wrong way. When you walk off a cliff, the first step is your last. There is no such thing as falling halfway down a cliff. But the “fiscal cliff” is not a cliff at all. The economic damage is cumulative. It is the opposite of the debt ceiling, when the doomsday clock ticked down to a moment of sudden calamity. A full year of inaction would do a lot of damage, but a week, a month, or even a couple of months would not. The president would have enough control over the mechanics of the budget to delay the effects of higher taxes and spending cuts in order to cushion the blow to the economy. Even if the tax hikes and spending cuts go into effect, any deal that gets signed later could be retroactive. Meanwhile, the Federal Reserve could also take emergency action to keep the recovery afloat.


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